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Why have umbrella companies been on the increase post-IR35?

Umbrellas have been around for many years and originally came into existence as a mechanism for self-employed contractors to be paid via payroll, meaning that their tax and NICs are taken care of.  But it’s not just about payroll. Umbrellas generally employ the contractor, meaning that they will receive all statutory rights and benefits of employment, whilst also having the freedom that being a contractor entails. 

Why do contractors use umbrella companies?

Many contractors stay with their chosen umbrella for a multitude of different assignments, giving them continuity of employment wherever they may be working. If a contractor is working numerous short assignments, such as shifts at different hospitals, the umbrella will consolidate their pay from all the different workplaces into one simple payment, with all the tax and NICs sorted too. 

The continuity of employment whilst working for different hirers can be important for anyone looking for finance such as bank loans and mortgages. Also, umbrellas are useful for anyone new to contracting as they can get started straight away with minimal admin involved. 

Why do recruitment agencies and hirers use umbrellas?

Umbrellas minimise the hassle and admin burden for recruitment agencies and hirers that use contractors.  Without an umbrella, the contractor would need to go on payroll, meaning that someone else has to:

  • Collect (and retain) contractors’ personal data
  • Calculate and process payroll
  • Issue payslips
  • Pay HMRC
  • Issue P45s and P60s

In addition, umbrellas manage the commercial, employment and statutory risks associated with engaging contractors. 

What’s all this got to do with IR35?

The off-payroll changes that recently came into effect mean that any contractor deemed “inside IR35” needs to be paid via payroll.  Hirers determine IR35 status, however who will process payroll for these outsourced workers?  Umbrellas are a solution because processing payroll is a core part of what they do.  In short, the off-payroll changes have created an increase in the use of umbrellas as contractors and hirers get to grips with how to pay “inside IR35” assignments via payroll. 

However, there is a downside

Whilst the majority of umbrella companies provide a valued professional service, there have been some downsides to the increase in their demand. The biggest concern is the increasing prevalence of tax avoidance schemes which disguise themselves as compliant umbrella companies, and aggressively target the contracting sector. 

These schemes are a huge problem because contractors can unknowingly end up with 6-figure tax bills owed to HMRC, which they are personally liable for.  The schemes are also a problem for both recruitment agencies and hirers alike if they have breached the Criminal Finances Act and found guilty of failing to prevent tax evasion. 

But it’s not just tax avoidance schemes that you need to be worried about.  There have been many instances of seemingly compliant umbrella companies having dubious practices exposed in recent years.  In particular holiday pay theft and skimming – where small amounts of money are retained but not declared – have been hitting the headlines recently. 

More legislation, and more risk

So, whilst umbrellas have a lot to offer, there is a lot you need to know about working with them.  Not only that, there is more legislation and more risk to come.  Join me at IR35 2023 - A Crucial Update Conference on Thursday, 21st September to find more – if you work with contractors “inside IR35” you really need to know this stuff. 

Article written by Julia Kermode, CEO - PayePass 

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Please contact Catherine Ouston our Head of In-house Training on 01983 861133 or email for further information.